File joint or separate? Tally it both ways

If you're like most married taxpayers, you'll sit down to your 1040 this year and dutifully check off the "Married filing jointly" box without a moment's thought.

Strategy: Don't assume you should file jointly every year. Although filing a joint return typically lowers your overall tax bill, even with the marriage penalty impact, it's not automatic.

In particular, a married couple can trim their overall taxes by filing separate returns if one spouse experiences an unusually large proportion of the couple's medical expenses, miscellaneous expenses or casualty losses. And some file separately to avoid joint liability.

For those reasons, it's wise to calculate your 2003 tax liability using both joint status and married-filing-separate status.

You always file a joint return and don't claim any deduction for medical or dental expenses. That's not unusual; only 5 percent of Americans deduct their medical costs. Reason: Taxpayers can start writing off medical expenses only once those expenses reach 7.5 percent of their adjusted gross income (AGI).

But suppose your spouse required expensive dental work last year and incurred $6,500 worth of unreimbursed medical and dental expenses. In comparison, your unreimbursed medical expenses totaled only $900 in 2003.

Filing separately: Now let's see what happens if you file separate tax returns for 2003. In that case, your spouse could earn a medical expense deduction because of her lower income. In fact, the deduction would reach a whopping $5,750 ($6,500 in expenses minus $750 [7.5 percent of $10,000]).

Other pros/cons of filing separately

Filing separately often comes with a price: Married-filing-separate taxpayers can't claim certain tax benefits, such as the dependent care or education credits. Also, filing separately on the federal level can affect your state income tax return.

The good news: Filing separately can help you avoid the 3 percent reduction on itemized deductions and the personal exemption phaseout.

Tomorrow's Training:

Paying employees for their travel time — and dealing with subsequent reimbursements and deductions — is one of the most confusing parts of HR and payroll administration. Discover the IRS and DOL rules regarding what is considered "travel time” versus "commuting time,” plus what is an allowable expense versus taxable wages....Click here to find out more.